• simeconomicssociety

Impact of US economic sanctions on Iran

Updated: Feb 2



Impact of US economic sanctions on Iran Written by: Jin Yuan


How it started

In the aftermath of Iran’s Islamic revolution (1978–79), a group of Iranian students in Nov 1979 stormed into the US embassy in Tehran, taking more than 50 people as hostages. As a result of Iran Hostage crisis, the US froze Iranian assets, including bank deposits, gold, properties, and they authorised a trade embargo against Iran. Since then, the US has lifted and imposed sanctions on Iran over various reasons (see Figure 1). (History,2010) (U.S Department of State, 2020)


Figure 1: History of sanctions on Iran

Source: CNN, Iran Hostage Crisis Fast Facts


Joint Comprehensive Plan of Action (JCPOA)

Years of tensions over Iran alleged efforts in developing nuclear weapon has resulted in the negotiation and the signing of JCPOA in 2015.This deal was signed by a group of world powers known as the P5+1 - the US, UK, France, China, Russia, and Germany. (Kelsey Davenport,2020)


Some of the terms under this deal includes limiting Iran to no more than 5060 centrifuges until 2026 from the 20,000 centrifuges it had in 2015. Centrifuges are used for uranium enrichment, or to make reactor fuel. Furthermore, Iran needed to reduce its Uranium stockpile to 300kg until 2031, stockpile level of 3.67% of the enrichment levels.


A 3-4% concentration level can be used to produce fuel for nuclear weapon plants. Whereas a 90% concentration level can be used to produce weapons. International observers would be allowed access into the country to certify whether Iran is compliant or not. This deal was to restrict Iran nuclear ambitions and in return the US and its allies would lift sanctions on Iran. Iran can tap into assets that have been frozen by previous sanctions, re-enter the international markets and global financial system for trade. It is also estimated that sanctions between 2012 to 2016 has cost the country more than 160 billion in oil revenue. (BBC,2019)


Things changed in 2016 when President Donald Trump was elected to office, he was opposed to this deal despite Iran’s compliance to the agreement. The reason he opposed was because the deal did not include Iran’s involvement with militants around the world, restrictions on the nuclear deal was not permanent and it did not deal with Iran’s ballistic missile development. Despite allies and other countries opposition to US leaving the deal, President Trump abandoned the deal in 2018. (DW,2017)


Impact on Iran

Economic growth of Iran


Figure 2: Iran Economic Growth

Source: Plecher, P. B., & 2, J. (2020, June 02). Iran - gross domestic product (GDP) growth 2021. Retrieved from Statista.


When sanctions were lifted, Iran’s economic growth rebounded from -1.59% to 12.52% in 2016, followed by a growth of 3.73% in 2017 (see Figure 2). With Iran being one of the main oil producers in the world and currently ranking second in the world for natural gas reserves and fourth in proven crude oil reserves, much of its growth was attributed to the export of oil and gas. However, the subsequent years proved to be tough as sanctions were imposed and thus the economy recorded negative growth. (U.S. Energy Information Administration,2020)


In a bid to save the nuclear deal, the 3 European countries (UK, Germany, and France) have set up a special purpose vehicle (SPV) to circumvent US sanctions and to facilitate non-US dollar trade for companies with Iran. Despite the SPV, major MNCs such as Siemens and Total are leaving Iran, for fear of breaching US sanctions on Iran. Companies that are found continuing to work with Iran are in a danger of flouting the US law and in the worst-case scenario, these companies themselves may be sanctioned and thus having difficulty accessing US markets. (Coppola,2019)


The main aim of US hardening stance and sanctions is to force Iran economy to crumble and bringing its oil exports to 0. As of today, their economy is in ruins and they have yet to give in to US pressure.


Oil exports and Non-oil exports income


Figure 3: Iran crude oil exports

Source: Iran Crude Oil: Exports [1980 - 2020] [Data & Charts]. (2019, January 01). Retrieved from CEIC data.


Figure 4: Iran oil vs non-oil export revenue

Source: Batmanghelidj, E. (2019, August 19). Thread by @yarbatman on Thread Reader App. Retrieved from Thread.


Since 2015 the exports of oil have climbed from 1081.145 barrels in 2015 to 1849.612 barrels in 2018. However, in 2019, when the sanctions were re-imposed, oil exports dropped to 651.131 barrels (see Figure 3). On the contrary, the figure above may not be accurate as countries like China still purchase oil from Iran despite the US sanctions on Iran. Buyers of Iranian oil products have made effort to conceal themselves. For example, Iranian oil tankers turned off their Automatic Identification System (AIS) transponders to prevent themselves from being identified or tracked by nearby ships. (Basquill,2018)

The Iranian government have also been looking for ways to reduce their reliance on oil revenue given the sanctions. And for the first time in 2019-2020, Iran’s economy had non-oil export revenue exceeding oil exports revenue, with non-oil exports totalling USD 41.3 billion, where manufactured goods made up of half of non-oil exported revenue.

The manufacturing sector has added 472,000 new jobs between March 2018 and December 2019, compared to the 315,000 jobs lost in the quarter following the reposition of U.S. sanctions. Despite this, the oil industry contracted 35% in 2019-2020, while the manufacturing industry shrank 1.8%. (Batmanghelidj,2020)


Currency devaluation



Figure 5: Iran currency

Source: Six charts that show how hard US sanctions have hit Iran. (2019, December 09). Retrieved from British Broadcasting Corporation.


Devaluation in a country happens when there is downward adjustment of the value of a country's money compare to another currency. There are several reasons why countries devalue their currency.

Firstly, by devaluing a country’s currency, it can boost the country’s exports, as the goods will be cheaper for other countries to buy.


Secondly, it will shrink deficits as imports will be more expensive and exports will be cheaper as such there will be a strong demand for cheaper exports.

Thirdly, it reduces sovereign debt burdens, a weaker currency would make a fixed payment debt less expensive over time. However, there are downsides to devaluing a currency. Imports will cost more for businesses which means there will be higher raw material costs. When raw materials cost increases, it will raise the overall price of the goods and services and those costs will be passed down to consumers. Quality of life will be impacted as you can purchase lesser goods now as compared to the past and $1 now may worth less in future.


The currency as a result, has experienced devaluation in the unofficial Iranian market. The devaluation is mainly due to corruption, weak economy, and demand for dollars among Iranian people (see Figure 5).


Social Impact

Inflation in Iran has soared from 7% in 2018 to more than 50% in 2019. With the rapid increase in inflation, the Iranian Parliament Research Centre estimated that 57 million more Iranians will fall into poverty over 2020 and between 23% to 40% of Iran’s population will be living in absolute poverty soon. While poverty may not be due to US sanctions on Iran, the sanctions have proven to be a catalyst with regards to the poverty situation in Iran. Against the backdrop of a dire economic conditions, there are limited things the government can do to support the people that need it as majority of the income is derived from oil exports. (Tatiana,2020)


In 2019, following a bid for the government to save more money, the government reduced its subsidies for petrol prices, and prices jumped 50% overnight, each motorist could get 60 litres of petrol a month at IR15,000 per litre (equivalent to USD 0.358) while extra fuel would still be available but at IR30,000 per litre. This move is touted to save the government USD 2.5 billion, giving the government some breathing space to purchase essential food and medical supplies and payment of salaries. (Bozorgmehr,2019)

With subsidies being removed, Iranian people are protesting in the streets, upset by the high cost of living and bleak economic prospects. In response to this, Vice President Mohammad Bagher Nobakht promised the population that 60 million people will receive compensation as a result from this move. Despite the 50% increase in petrol prices, Iranian petrol prices remains as one of the world lowest price. (Bozorgmehr,2019)


Conclusion

In conclusion, economic sanctions have failed to force Iran to give into US pressure and the citizens and the country’s poorest have been the most affected by the sanctions. Despite this, Iranians have learnt to improvise by leaning on other sectors for growth, with the manufacturing sector likely to be the next growth engine for Iran. However, damages caused by the sanctions are likely to be permanent, even if sanctions are lifted by future presidents, growth will likely take time to come back.




References

Basquill, J. (n.d.). Steering clear of Iran petroleum sanctions. Retrieved from Global Trade Review.


Batmanghelidj, E. (2020, June 15). It's manufacturing that's giving Iran a lifeline, not oil. Retrieved from The Print.


Bozorgmehr, N. (2019, November 14). Iran raises petrol prices by 50% as US sanctions bite. Retrieved from Financial Times.


Coppola, F. (2019, June 30). Europe Circumvents. Retrieved from U.S. Sanctions on Iran.

D. W. (n.d.). What are Donald Trump's objections to the Iran nuclear deal (2017, September 20). Retrieved from DW.


Editors, B. (2019, June 11). Iran nuclear deal: Key details. Iran Sanctions - United States Department of State. Retrieved from BBC.


EIA. (n.d.). Independent Statistics and Analysis. Retrieved from U.S. Energy Information Administration.


Iran nuclear deal: Key details. (2019, June 11). Retrieved from BBC.


Kelsey Davenport, (2020, October). Fact Sheets & Briefs. Retrieved from Arms Control.


Tatiana. (2020, February 04). 7 Facts About Poverty in Iran. Retrieved from The Borgen Project.

Connect with us!

Email: 

economic@mymail.sim.edu.sg

  • White Facebook Icon
  • White Instagram Icon
  • White LinkedIn Icon
  • kisspng-telegram-computer-icons-WHITE

Location: 

SIM Economics Society
Singapore Institute of Management HQ
461 Clementi Road
Singapore 599491